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Why QIC and the CEFC’s partnership could yield some great benefits

CEFC's Chris Wade and QIC's Michael Fattouh

If you wondered what’s wrong with the shopping centre industry, why it refuses point blank to back mandatory disclosure of its energy efficiency ratings as other property sectors do, chat to Michael Fattouh.

He’s the fund manager for the QIC Shopping Centre Fund. He might just drop a little bombshell of intelligence.

During a recent interview with The Fifth Estate that also included Chris Wade, director, head of property, for the Clean Energy Finance Corporation, this is what happened.

Fattouh and Wade had teamed up in a conference call to explain how two years ago they’d entered an agreement to implement some serious energy efficiency improvements in the QIC retail property assets.

It was a $200 million debt facility from CEFC and the deal was that the results of the program and relevant resources would be shared with whoever else cared to view them.

The work is now starting to bear fruit. Among the key program items are LED lighting installations and a keen eye cast over the potential for solar PV (photo voltaics) for distributed renewable energy.

Program of works

Among the work carried out was installing LED lighting throughout the car parks and “back of house”, the replacement of plant and equipment and optimising how the fund uses that plant and equipment in terms of the technology.

A key consultant used in the process was CIM Enviro, which used a data-driven system that quickly detects failures in energy performance including the location of the faults, root cause, cost impact and the solution, a report on the collaboration said.

At a trial at Robina Town Centre the system produced a 15 per cent reduction in energy consumption and a net increase in the centre’s cash flows after counting the cost of the ACE platform, the report says.

There was also $18,000 savings in maintenance through initiatives such as real time identification of over 200 faults (with a closure rate of 90 per cent) across the centre, including essential plant and equipment such as fan coil units, air handling units and chillers.

The legendary issue of shopping centres’ energy guzzling profile

In the draft review of the Commercial Building Disclosure Program that The Fifth Estate obtained last month The Centre for International Economics said mandating NABERS energy rating disclosure for shopping centres was simply too tough.

Other sectors could well be moved onto the scheme that’s been so successful in lifting energy performance in offices, but no, the recommendation was to leave shopping centres out of the picture.

Industry experts who deal with these issues every day and had to listen to the excuses in industry forums apparently found them openly laughable, but there you are.

It’s strange then that some leaders in the sector are tackling the issue and not finding it particularly onerous.

QIC for instance.

Chris Wade said his team had earmarked the retail property sector for its well located urban addresses, just right for distributed energy hot spots. It ranks alongside industrial property for its nice roofing real estate.

But it was during the conference call interview that Fattouh revealed why shopping centres find it so hard to save energy.

Yes, they definitely should. They have vast open spaces that look grand and inviting if you’re a retailer or owner wanting to encourage loose-purse-syndrome in these temples of consumption.

Tenants too, all want great airconditioning but with the doors wide open and inviting for customers. And that’s before we get to the foodcourts and their voracious appetite for energy.

But according to Fattouh there are some structural impediments to lifting the performance of the centres.

Shopping centres are the kind of infrastructure that tends to grow as the community around it grows.

So bits are tacked on over time and of course there is a constant demand for refurbishment that’s deemed essential to keep the interest of gadfly spenders, always looking for new stimulation to get excited about.

It’s likely plant and equipment though is running to an entirely different life cycle rhythm to the rest of the centre’s expansion so that when the centre is growing it might not be the optimal time to justify expensive capital expenditure to bring systems up to scratch.

You might have to destroy a lot of building and deliver on energy efficiency, Fattouh says.

“Castle Towers for instance, we bought that as neighbourhood sub-regional so a fraction of the size, and it was built over a period of time.”

There are other impediments of course. The very nature of shopping centres to attract heavy foot traffic is one.

As Frasers Property told us in reference to with the Living Building Challenge standards it’s committed to at the old Brickworks shopping centre site at Burwood in Melbourne

it’s easy to get excellent energy efficiency if you have a closed box that no one ever goes to.

QIC isn’t the only one stepping up to the challenge

Despite the difficulties some leaders are clearly pushing through.

Another is Vicinity Centres that recently announced a strong energy efficiency program to go with its ambitious rooftop solar program.

The company, with its 34 wholly-owned shopping centres wants to achieve net zero carbon by 2030.

Check out too the Green Bonds issued in April by Woolworths, certified by the Climate Bonds Initiative.

The move is part of ramping up the retailer’s sustainability programs such as installing LED lights, hybrid or HFC-free refrigeration systems, reducing plastic on fruit and vegetables and the Woolworths Organic Growth Fund, the company’s media statement said.

QIC’s Claremont Quarter shopping centre in Western Australia

Of course when it comes to big grocers like Woolies with their huge freezers and refrigeration units you’d imagine there’s a wad of dollar savings incentives operating alongside the carbon savings of such programs.

There’s a range of pressures behind these early movers (and no doubt a small posse of followers).

First, changing consumer preferences. Even though it’s true that the Shopping Centre Council of Australia argues that no one is going to go to an alternative centre because it’s got a 5 star NABERS rating instead of a 3 star, these influences have a way of worming their way through the retailers to the property owner. They gently lift the fog of indifference.

Investors are also pushing for their real estate to meet better more strict sustainability standards under a general ESG umbrella.

According to Woolworths Group chief financial officer David Marr the green bond and sustainability is part of the responsibility that comes with being Australia’s largest retailer to consider consumers but also needs of investors.

“We know the investment community is also looking to support companies committed to sustainability driven projects that minimise environmental impact,” he said.

It makes sense for the CEFC to target the biggest energy guzzlers

But overall shopping centres are by their nature still the biggest energy guzzlers in the property sector.

“If we look at the commercial property sector, retail is the largest emitter of carbon emissions,” Wade says.

Ian Learmonth, the CEFC’s chief executive, said at the time of the partnership announcement in 2017 that shopping centres accounted for 36 per cent of commercial building energy consumption, thanks to the vast spaces and non stop airconditioning.

It’s in this difficult context that the Clean Energy Finance Corporation decided to invest its debt funding – since its mandate is to target the tricker end of carbon emissions reduction.

QIC was a good place to start. The fund is the largest retail sector unlisted fund in Australia with an exposure to a portfolio of Australian regional-grade shopping centres valued at circa $13 billion over 24 shopping centres.

For Fattouh the timing was excellent. Not only was pressure for better environmental performance mounting from within but from the investors as well.

“We’ve seen within our communities an increased focus on how we manage energy consumption and we’ve looked at ways of improving energy efficiency and reducing our carbon footprint,” he said during the interview. “It’s something that’s important to all our stakeholders.”

So the social and governance perspective was important. And the rising electricity prices only helped to underscore the imperative.

Another motivation was that there had been a desire to diversify sources of capital – debt and equity.

In 2017 the company secured a loan from a US private placement issue and this delivered some diversity in debt. Until then the fund had been only exposed to banks and the bond market.

At around the same time the fund engaged with the CEFC.

“They were interested in lending the fund some money linked to a sustainability framework,” Fattouh said.

“The opportunity there was 8-10 years… something we couldn’t get anywhere else. So a different debt provider, not a traditional bank.”

It took CEFC’s Chris Wade and Fattouh almost two years to work up a suitable deal.

“And of course, because it was a new focus on shopping centres we had to start from scratch,” Fattouh said. “There was not necessarily a formula or framework we could use, nor targets for the fund.

“So we spent some time working that up and a few things we agreed on. One of these was to use NABERS as tool to deliver the outcomes.”

“We agreed on a target 4 stars average by 2021.”

The portfolio was sitting at around 3 stars.

“So we went through a process and assessment whereby we engaged consultants to define how we would achieve that 4 stars and we came up with number of initiatives we’re in the process of implementing.”

Chris Wade says his team looked at it as a partnership.

“We were trying to understand where that sector is at and then work with partners to work out programs and implement them in a commercially viable way.”

The expectation was that there would be savings and benefits for the business and tenants alike.

Key to the CEFC’s mandate is the sharing of the outcomes of its programs.

The flip side of difficulty is opportunity

Wade could see a chance to improve the sector’s profile, particularly the role of rooftops in distributed energy.

“We were looking for a partner we could work with” he says – not only to drive key initiatives, but with additional opportunities for the grid. And shopping centres happen to be placed in handy urban locations for this.

A recent report on distributed energy by the CEFC, and the Property Council of Australia, particularly noted the potential of shopping centres as well as industrial property as sources of distributed energy.

The game changer, Wade says, is using the expanse of roofspace.

“This is will be an important step for us and we have a number of other targets; they constantly evolve and they align with what we’ve agreed with CEFC.”

Overall the fund is hoping to source 30 per cent of its energy from renewables by 2025.

Fattouh says a nice payoff is that the program offers plenty of opportunity to engage with customers and tenants.

Energy saving is like that, he says.

It’s an opportunity for landlords to engage with retailers, especially as they explore new technologies.

It’s also a chance forbrand positioning and engagement”.

“If we know our customers care about the environment there are opportunities to enhance our brand.

“Our strategy is very much about how we engage with our communities. And we connect to that on a number of fronts.”

“Electric vehicles in centres, for instance.”

It’s also a positive engagement opportunities with investors, whether institutional funds or debt capital markets.

Wade says the signs of interest from the capital markets are strong.

Fattouh agrees.

“My general observations is that there is definitely increased interest from institutional investors and the debt capital markets.”

They want to know how property owners are positioning themselves. There are “constant questions on sustainability and reducing emissions.”

Tenants are tricky of course. They’re able to buy their own electricity and the company tries to encourage energy efficiency practice.

“We see ourselves as leading by example”.

Waste and water recycling is also important and QIC has a target of 20 per cent savings in energy water and waste by 2020.

“Ever since we secured the loan facility with the CEFC we’re just running with it. We think it’s an opportunity to provide a point of difference.”

There is no excuse for anything different, he says.

“The technology is there, the opportunities are there and we’re running with it.”

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